Oil Tumbles as Rising Shale Output Risks Mounting Supplies

  • U.S. crude and gasoline supplies drop, fuel demand jumps
  • Production expands to highest level since July 2015, EIA says

Oil skidded to its lowest level in more than a week as rising U.S. production stirred worries of persistent brimming supplies.

Futures settled 1.1 percent lower in New York, reversing an earlier creep toward $50 a barrel during the session. While a decline in U.S. inventories and a rise in gasoline demand helped prop up prices on Wednesday, production at its highest since July 2015 and shale producers like EOG Resources Inc. boasting higher production targets in their earnings reports dampened sentiment. Adding to the concerns, Andy Hall, one of the most storied oil traders, is said to be closing down a fund.

Oil climbed above the key $50-a-barrel-level this week for the first time since May as Saudi Arabia promises to trim exports this month. Even so, investors continue to evaluate whether more U.S. shale oil will flood the market and suppress prices, while the Organization of Petroleum Exporting Countries and its allies work to curb production.

"As far as the rise in production, that is something that definitely the bears are going to glom onto," Phil Flynn, senior market analyst at Price Futures Group Inc., said by telephone, "because they’re saying, hey, the shale guys are going to revive for another day."

West Texas Intermediate for September delivery dropped 56 cents to settle at $49.03 a barrel on the New York Mercantile Exchange. Total volume traded was about 17 percent above the 100-day average. The contract advanced 43 cents to $49.59 on Wednesday.

See also: Oil’s Going, Going, Gone: Auctions Reveal Clues on Crude’s Worth

Brent for October settlement lost 35 cents to close at $52.01 a barrel on the London-based ICE Futures Europe exchange, after advancing 58 cents on Wednesday. The global benchmark crude traded at a premium of $2.82 to October-delivery WTI, the largest premium since May.

Brent futures for the nearest delivery traded at a discount of 1 cent to those for the following month. The spread traded in backwardation during the session. This pattern typically signals tighter supplies, while the opposite contango structure signals a glut.

Full Steam Ahead

American shale drillers EOG Resources, Devon Energy Corp., Newfield Exploration Co. and Diamondback Energy Inc. outlined goals that would help raise U.S. production to a record 10 million barrels a day next year. In a blow to investors concerned about the oil glut, the drillers also said they’ve gotten more efficient.

The prospect of $50 oil may buoy sea drillers, with rig-supplier Transocean Ltd. predicting explorers could soon shift their spending from land to sea.

‘Hall Story’

Hall, who has been trading oil since the 1970s and has sometimes been referred to as “God” by his peers, is closing down his main hedge fund after large losses in the first half of the year, according to people with knowledge of the matter. The global crude market has “materially worsened" and prices may be stuck around $50 a barrel or below, Hall told investors in his Astenbeck Capital Management LLC firm in a letter last month.

The legendary trader, who gained notoriety in 2009 when he earned a $100 million pay package from Citigroup Inc., had until recently been one of the most bullish voices in the market.

"This Andy Hall story sometimes can be just enough to get people to take at least a short-term move in the market," Flynn said. "When you don’t have a lot to go on, sometimes a headline like that can be enough to get a few people to cover and get a few computers to light up."

EIA Report

U.S. production increased by 20,000 barrels a day to 9.43 million last week, the Energy Information Administration said Wednesday. Crude inventories fell by 1.53 million barrels, while gasoline stockpiles dropped to the lowest level since December. Gasoline consumption surged to a record high.

“In the end, it looks like we are continuing to see lower inventories, not only on the oil side, but also on the product side. Demand remains quite robust,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said by telephone. Yet, prices won’t rally too much further “until there is more certainty surrounding OPEC policy and what the fundamentals will look like into next year.”

Oil-market news:

  • Khalid Al-Falih, Saudi Arabia’s energy minister, is said to have met some of the world’s top commodity hedge funds in July, taking the unusual step of personally canvassing investor views on the state of the market.
  • Chesapeake Energy Corp. beat profit forecasts even as production declined.
  • Abu Dhabi National Oil Co. asked banks for proposals to manage the sale of a project bond and is also seeking a loan as it considers raising as much as $7 billion, according to people with knowledge of the matter.

— With assistance by Ben Sharples, and Angelina Rascouet

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